MARKETS THAT DON'T REPLICATE ANY OPTION

Charalambos D. Aliprantis and Rabee Tourky

No 832, Department of Economics - Working Papers Series from The University of Melbourne

Abstract: It is well known from the work of S. Ross that a securities market is complete if and only if each call option can be replicated using available securities. The present short note announces the following surprising complementary result to Ross' important contribution. . If the number of securities is less than half the number of states of the world, then not a single option can be replicated by traded securities. This provides further strong motivation for relaxing the assumption of a perfect market in the theory of option pricing and portfolio insurance.

Keywords: Backward Induction; subgame perfect equilibrium; Nash equilibrium (search for similar items in EconPapers)
JEL-codes: C7 (search for similar items in EconPapers)
Pages: 8 pages
Date: 2002
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Citations: View citations in EconPapers (10)

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